Hiroshi Nakaso: Monetary policy divergence and global financial stability - from the perspective of demand and supply of safe assets

Speech by Mr Hiroshi Nakaso, Deputy Governor of the Bank of Japan, at a meeting hosted by the International Bankers Association of Japan, Tokyo, 20 January 2017.

I. Introduction

In February 2008, the Financial Times ran an article describing the Bank of Japan as "Fortress Japan." The article noted that the Bank was functioning as a fortress for Japan, shielding the Japanese financial system from the turmoil in the global financial markets triggered by problems in the U.S. subprime mortgage loan market. As you know, the Bankā€²s objective of maintaining financial system stability is as important as that of maintaining price stability. In order to fulfill this responsibility, not only is it important to uphold a microprudential perspective, which aims to understand the risks faced by individual financial institutions and encourages management responses thereto, but it also is important to formulate and implement policies from a macroprudential perspective, which aims to analyze and evaluate risks to the financial system as a whole.

Following the recent global financial crisis, the financial landscape is radically changing, with U.S. and European banks shrinking their balance sheets and non-banks, such as investment funds, increasing their significance. At the same time, in the sphere of monetary policy, we are now experiencing monetary policy divergence, where interest rates have been kept low for long periods in both Japan and Europe but the United States is entering a rate increase cycle. In order to maintain financial system stability in such a changing global financial environment, it is necessary to ensure that there are no hidden vulnerabilities from both the microprudential and macroprudential perspectives. Today, I would like to approach this issue through the looking glass of the demand and supply of safe assets.